With a relatively closed market, tight regulations and political volatility, Syria is a tough market for telecom operators. Milan Sallaba, partner, Oliver Wyman, tells CommsMEA where the country's potential lies.
Despite having a large young population and a relatively low mobile penetration rate, Syria remains a tough market for private telecom operators looking to enter the market.
And the situation has become more difficult in the past few years, partly owing to tightening US sanctions, which have been in place since 2004.
For the telecoms sector, the sanctions mean that operators have been forced to acquire telco equipment from alternative providers, including France and China.
It also makes it more difficult for the telecoms sector, and the country as a whole, to open its doors and become a fully liberalised and fluid market.
"In brief, a lack of infrastructure, underdeveloped services, lack of competition, an overly government-controlled communication sector all contribute to hamper take up and growth, and do not reflect the underlying market potential," says Milan Sallaba, partner, Oliver Wyman.
He also cites political factors such as "partial international isolation, a controlled and closed economy, traditional dependence on oil in face of depleted oil resources going forward" as contributory elements to the plight of Syria's telecoms sector.
Other concerns hindering an effective communications industry is the highly dispersed population in relation to other countries in the region.
With only 51% of the population living in urban areas, compared to 80-90% in neighbouring countries, it is difficult to ensure coverage and be cost effective in rolling out new networks.
In addition, the country's dependency on oil remains a significant concern.
"Syria's economy has been heavily dependent on oil in the last decades; it is projected to become a net importer of oil in 2010, and will fully exhaust its reserves by 2030," explains Sallaba.
"Analysts believe Syria has a five-year window of opportunity to use oil revenues to finance sufficient economic diversification and growth."
The International Monetary Fund (IMF) ranks Syria 125th out of 131 countries for financial market sophistication, and 128th for prevalence of foreign ownership. But the government is starting to make the first overtures to change this.
"The Syrian government is planning to privatise several public companies within the next two or three years. It also recognises the need for a large degree of foreign direct investment (FDI); perhaps as much as US$3-4 billion per annum," Sallaba continues.
A national ICT strategy, drawn up in conjunction with the United Nations Development Programme (UNDP), is also being implemented to develop the ICT industry in Syria.
By 2013, country targets include a fixed-line penetration of 30%, mobile penetration of 30% and an internet penetration of 20%. In a country boasting almost 20 million people - 60% of which are under the age of 25 - this is a significant market to be involved in.
While Syria's neighbour Jordan is home to one of the most liberal telecom markets in the Middle East, Syria is the polar opposite.
Indeed, the Syrian Telecommunications Establishment (STE), which is the sole provider of infrastructure and is responsible for all telecommunications in the country, has a strong hold on the industry.
"STE is effectively the operating arm of the Ministry of Telecoms and Technologies but has financial and administrative independence," says Sallaba. "There are plans to form a separate regulatory authority, the current status of which remains unclear.
Competition in telecoms ranges from monopoly in fixed, duopoly in mobile and partially open in internet. New competition is apparently ‘mandated' from agreements to come in by 2010 and a new mobile provider is expected in 2008-09," he adds.
In terms of mobile usage, which is widely considered the most dominant aspect of telecom services in the region, penetration remains low compared to its neighbours. But this means there is high potential.
There are around 6.7 million mobile subscribers, with mobile penetration increasing from 6% in 2003 to around 35% at the end of 2007.
Sallaba attributes this rise to declining connection costs, as well as a growing number of additional pay-as-you-talk offerings from 2005 onwards. According to him, ARPU has also slipped from US$41 in 2003 to about US$21 at the end of last year. Part of the problem is that there are only two mobile operators, Syriatel and MTN Syria (formerly Areeba), and these are strictly controlled by STE. And because of revenue sharing stipulations by the regulator, there is no real price competition between the two operators. This means
"Product and service offerings for both consumers and business segments are underdeveloped and 3G is not in place yet, Sallaba says. "The regulator (STE) commands a high percentage of revenue share from all providers (30-60%) and controls price competition.
All price changes must be agreed by STE and both mobile players.
A third mobile licence is also expected to be introduced in 2009, awarded to the STE itself.
That would fly in the face of all competitive principles and undermine the core reason to establish multiple operators in the first place, and I would not be surprised if we will see a huge increase in pressure on Syria, both nationally and internationally, to establish an independent regulator should this situation indeed arise," Sallaba says.
In the world of fixed-line, the situation is equally dire. STE has a complete monopoly on all voice telephony, submarine lines and satellite communications, and competition is not expected before 2010. As such, infrastructure is underdeveloped and products and services limited, creating large waiting lists for fixed lines. As of 2006, fixed-line penetration stood at around 16%.
Nevertheless, STE plans to invest US$1.45 billion in its landline network between 2008 and 2013, with the objective of adding 4 million lines and targeting underserved areas. With low calling rates, there is still demand to be tapped.
Similar things can be said of internet penetration, which suffers from low penetration, particularly in broadband. Censorship is very high: the government instigates a block on several popular websites. It's been reported that Hotmail and YouTube are unavailable, and most recently, Facebook was added to the list of banned websites.
"With an estimated population of about 19.2 million in 2007, internet penetration stood at around 3.6%, with broadband standing at 0.04% (roughly 7,000 lines).
However, internet growth rates are almost 100%, and 35-40% for broadband, so we are likely to see more significant penetrations very soon.
The increase in take up in 2006/7 was mainly due to the availability of affordable pre-paid internet cards with flexible timeframes and a variety of denominations," says Sallaba.
"The slow take up of ADSL is believed to be due to high prices (versus income and dial up) for installation, equipment and line rental and lack of geographic availability.
Significant further investment appears necessary to improve availability and penetration, particularly of broadband," Sallaba adds.
Licensing laws for internet service providers (ISPs) have been in place since 2004, and new licences were awarded in January 2005.
Today, there are around 12 ISPs, but these are unique only in their level of customer service. In addition, the process of getting a connection installed is an arduous one, depending on who you know.
"Effectively ISPs white label STE's service, and differentiate based on customer service," Sallaba explains.
"If you are a consumer then you will apparently need to know people in the government, for example, to get a line installed quickly - otherwise a very long wait is the norm," he adds.
"This is symptomatic of the issues facing the sector. What's needed is a much-needed boost via a shakeup in the regulatory regime and the introduction of genuine competition. But exactly when this will happen is unclear.
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